Intro

nit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk
protection and flexibility in investment. The investment is denoted as units and is represented by
the value that it has attained called as Net Asset Value (NAV). The policy value at any time
varies according to the value of the underlying assets at the time.

In a ULIP, the invested amount of the premiums after deducting for all the charges and premium
for risk cover under all policies in a particular fund as chosen by the policy holders are pooled
together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance
Policy.

The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP
investors have the option of investing across various schemes, i.e, diversified equity funds,
balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor.

In a ULIP, investors have the choice of investing in a lump sum (single premium) or making
premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the
flexibility to alter the premium amounts during the policy's tenure. For example, if an individual
has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced with
a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). ULIP investors can shift their investments across various
plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a nominal or
no cost.

Expenses Charged in a ULIP

Premium Allocation Charge:

A percentage of the premium is appropriated towards charges initial and renewal expenses apart
from commission expenses before allocating the units under the policy.

Mortality Charges:
These are charges for the cost of insurance coverage and depend on number of factors such as
age, amount of coverage, state of health etc.

Fund Management Fees:

Fees levied for management of the fund and is deducted before arriving at the NAV.

Administration Charges:
This is the charge for administration of the plan and is levied by cancellation of units.

Surrender Charges:
Deducted for premature partial or full encashment of units.

Fund Switching Charge:

Usually a limited number of fund switches are allowed each year without charge, with
subsequent switches, subject to a charge.
Service Tax Deductions:
Service tax is deducted from the risk portion of the premium.

UNIT-linked insurance plans (ULIPs) are the flavour of the season. Launched a couple of years
ago, these plans have contributed over 50 per cent of the new business of insurance companies
such as ICICI Prudential and Birla Sun Life.
Encouraged by the response, other players, too, are launching variants of savings and endowment
plans in the unit-linked format. A recent addition to the range of insurance products,
ULIPs claim to give an investor the best of both worlds — high returns and risk cover. But look
deeper, and you find shortcomings. So do consider the following points before going in for a
ULIP.
 It is prudent to make equity-oriented investments based on an established track record of at
least three years over different market cycles. ULIPs do not fulfil this criterion now.
 Insurance and savings are two different goals and it is better to address them separately rather
than bundle them into a single product. A combination of a term plan and a mutual fund could
give better results over the long term.
 If investment returns are your priority, you should compare alternative investment products
before locking in your money.
 Tax advantages do work in favour of ULIPs for debt-oriented funds. For equity-oriented
funds, equity-linked savings products, which enjoy tax advantages and provide market-linked
returns, are comparable.
 The expense structure of insurance products does significantly dent returns.
Returns not sustainable...
The core selling point for unit-linked plans are the high returns generated over the past couple of
years.
The growth options have recorded annualised returns of over 20 per cent — a distant dream for
an insurance product in an era of non-guaranteed returns. Most non-linked savings plans declare
annual bonuses (investment returns) in the 4-5 per cent range.
As insurance companies have the discretion to decide on their investment portfolios, ULIPs can
even have a 100 per cent equity component. But non-linked plans do have an IRDA-stipulated
cap on investment in various asset classes. A minimum of 50 per cent has to be invested in State
and Central Government securities and only 35 per cent can put into corporate debt or equity.
In the long run (say, a 20-year term), the average return from a non-linked plan might work out
to 5-6 per cent. In comparison, a linked plan appears far more attractive, at least on the face of it.
... but one has to remember that
These high returns (above 20 per cent) are definitely not sustainable over a long term, as they
have been generated during the biggest bull run in recent stock market history.
The free hand given to ULIPs might prove risky if the timing of exit happens to coincide with a
bearish market phase, because of the inherently high equity component of these schemes.
While a debt-oriented ULIP scheme might be superior to a debt option in a conventional mutual
fund due to tax concessions that insurance companies enjoy, such tax incentives may not last.
Look beyond NAVs
The appreciation in the net asset value (NAV) of ULIPs barely indicate the actual returns earned
on your investment. The various charges on your policy are deducted either directly from
premiums before investing in units or collected on a monthly basis by knocking off units.
Either way, the charges do not affect the NAV; but the number of units in your account suffers.
You might have access to daily NAVs but your real returns may be substantially lower.
A rough calculation shows that if your investments earn a 12 per cent annualised return over a
20-year period in a growth fund, when measured by the change in NAV, the real pre- tax returns
might be only 9 per cent. The shorter the term, the lower the real returns.
How charges dent returns
An initial allocation charge is deducted from your premiums for selling, marketing and broker
commissions. These charges could be as high as 65 per cent of the first year premiums. Premium
allocation charges are usually very high (5-65 per cent) in the first couple of years, but taper off
later. The high initial charges mainly go towards funding agent commissions, which could be as
high as 40 per cent of the initial premium as per IRDA (Insurance Regulatory and Development
Authority) regulations.
The charges are higher for a linked plan than a non-linked plan, as the former require lot more
servicing than the latter, such as regular disclosure of investments, switches, re-direction of
premiums, withdrawals, and so on. Insurance companies have the discretion to structure their
expenses structure whereas a mutual fund does not have that luxury. The expense ratios in their
case cannot exceed 2.5 per cent for an equity plan and 2.25 per cent for a debt plan respectively.
The lack of regulation on the expense front works to the detriment of investors in ULIPs.
The front-loading of charges does have an impact on overall returns as you lose out on the
compounding benefit. Insurance companies explain that charges get evened out over a long term.
Thus you are forced to stay with the plan for a longer tenure to even out the effect of initial
charges as the shorter the tenure, the lower your real returns.
If you want to withdraw from the plan, you lose out, as you will have to pay withdrawal charges
up to a certain number of years.
In effect, when you lock in your money in a ULIP, despite the promise of flexibility and
liquidity, you are stuck with one fund management style. This is all the more reason to look for
an established track record before committing your hard-earned money.
Evaluate alternative options
As an investor you have to evaluate alternative options that give superior returns before
considering ULIPs.
Insurance companies argue that comparing ULIPs with mutual funds is like comparing oranges
with apples, as the objectives are different for both the products.
Most ULIPs give you the choice of a minimum investment cover so that you can direct
maximum premiums towards investments.
Thus, both ULIPs and mutual funds target the same customers. If risk cover is your primary
objective, pure insurance plans are less expensive.
When you choose a mutual fund, you look for an established track record of three to five years of
consistent returns across various market cycles to judge a fund's performance.
It is early days for insurance companies on this score; investing substantially in linked plans
might not be advisable at this juncture.
Moreover, with the market at a high, if you get your timing wrong, your long-term returns could
be compromised. Linked plans should have minimum allocation in your portfolio of investments
at present. One may consider linked plans favourably about three years from now, when one can
assess their record.
If you already have a ULIP, these tips can help you lower your costs and increase returns.
Try top-ups
Insurance companies allow you to make lump-sum investments in excess of the regular
premiums. These top-ups are charged at a much lower rate — usually one to two per cent. The
expenses incurred on a top-up including agent commissions are much lower than regular
premiums.
Some, like Aviva, also give a credit on top-ups. For instance, if you pay in Rs 100 as a top up,
the actual allocation to units will be Rs 101. If you keep the regular premiums to the minimum
and increase your top ups, you can save up on charges, enhancing returns in the long run.
Reduce life cover
The price of the life cover attached to a ULIP is higher than a normal term plan. Risk charges are
charged on a daily or monthly basis depending on the daily amount at risk. Rates are not locked
and are charged on a one-year renewal basis.
Your life cover charges would depend on the accumulation in your investment account. As
accumulation increases, the amount at risk for the insurance company decreases. However, with
increasing age, the cost per Rs 1,000 sum assured increases, effectively increasing your overall
insurance costs. A lower life cover could yield better returns.
Stay away from riders
Any riders, such as accident rider or critical illness rider, are also charged on a one-year renewal
basis. Opting for these riders with a plain insurance cover could provide better value for money.

WAR

The turf war between the Insurance Regulator (IRDA) and the Securities Regulator (SEBI) is
finally over. The government, on June 19th, passed an ordinance that granted full regulatory
control of the Unit Linked Insurance Product (ULIP) market to IRDA, foxing many financial
commentators. To an outsider, the brouhaha seems strange, but there's a history to it. (Isn't there
always?)
Insurance has meant that you pay a certain amount of money so that if there is damage or a
demise, there is a cash payout to compensate. If nothing happens, you lose the 'premium' paid.
In India, life insurance, in particular, has seen a different twist. People are sold products that
return money even if they survive. So you pay Rs. 100,000 per year for 20 years, and you can get
Rs. 50 lakhs back if you survive, and should you die, you have 'insurance' of 5 lakhs during this
period. A part of your premium goes to cover the 'risk' of the 5 lakhs of insurance. Another part
goes to cover fees and charges. What is left goes into an investment fund that will be invested
and will grow over time.
Such products mix investment and insurance, and traditional 'endowment' products have been
opaque offerings. An insurance company would only take the premium from you, and not tell
you how much of that was fees or risk premium or investments-they would announce a 'bonus'
every year, which would range from 4% to 9%, and you knew that was how much your total
premium had grown that year.
Unit Linked Endowment products came in, promising more transparency, segregating and
revealing costs, insurance and investment pieces. Additionally, you could choose the broad
categories in which your money was invested-from risky avenues like stock markets, to very safe
avenues.
This should have been good, compared to the traditional endowment market. But not the way it
was implemented. ULIPs started confusing customers with complex products, where the costs
weren't obvious. For example, some brochures mention 'Premium Allocation Charges' of 30% -
meaning, they charge you 30% of your premium as this particular charge, and after taking out all
other charges, the remaining is invested. Another product would mention a 'Premium Allocation
Rate' of 30% - meaning only 30% of your premium was invested. And sometimes they would
move the costs into a Policy Administration Charge, as the IRDA, the insurance regulator,
looked the other way.
Other strange charges were surrender charges-after charging you through the roof for the act of
investing, insurers decided it was correct to penalize you for an attempt to take your money
back-charges range from 5% to 100% in the first five years. The standard reply: ULIPs are long-
term products, and this is the way we make them so. Yet, they charge the highest in the first few
years of a policy and reduce the charges later-meaning, they're not thinking longer term
themselves; if they were, they would spread the charges evenly over the entire term. And the
practice defeats the compounding concept: your first investments make the maximum rupee
gains in the long term, but when they extract the maximum flesh from the initial premiums, your
eventual gains are crippled.
The muddled and high cost structure negated any transparency benefits. It didn't matter that some
of these quirks were unearthed by financial journalists. Indeed, if you search for ULIP-related
articles, nearly every single mainstream financial publication has carried articles against such
practices; yet, people continued to buy them, even those with continuous access to the internet.
The reason: agents, who got a good chunk of those high initial charges as commissions, chose to
highlight products as god-like offerings tailor-made just for those people who didn't have time to
decode a complex brochure or, seemingly, search the internet. They would lie, oversell, under-
insure, or generally ignore their fiduciary duty as 'advisors'. Again, IRDA chose not to cap the
incentive commissions that promoted such behavior, arguing that any cap would hurt the
industry.
In comparison, mutual funds have been much better products to invest in. With their regulator,
SEBI, actively clamping down on mis-selling, charges have been reduced to just one-the 'fund
management charge, capped at 2.5% per year. There is no entry load, and any advisory fees must
be paid directly to the advisor, not embedded in the products. SEBI's actions made mutual fund
agents poorer-the milking through entry loads was no longer possible-so agents moved
substantial amounts of assets from the mutual-fund industry to higher -commission-paying
ULIPs.
As a response, SEBI unearthed a technicality: since most ULIPs have a negligible insurance
component, they are really collective investment products, which SEBI has the right to regulate.
IRDA, noting that nearly 50% of the insurance business was ULIPs , decided to fight it out.
The rules were ambiguous, so the government had to take a stand. Admitting to SEBI oversight
would unearth an uncompetitive product that gathered investment of nearly 1% of GDP, and
perhaps even hurt investors in the short term as the concept was overhauled. IRDA would be
embarrassingly compromised as a regulator. Insurers who made money milking investors would
see immediate cash-flow problems. In hindsight, SEBI didn't have too much of a case; there are
many products that qualify under SEBI's criteria of collective investment, but aren't regulated by
SEBI. Plus, the main issue was the mis-selling, which most commentators thought the IRDA
wasn't capable of curing.
A political decision was taken- in a process that some say did not include SEBI -to make IRDA
the regulator for ULIPs. Some say insurers rescued certain government public issues, and this
was just quid-pro-quo. What happened doesn't matter anymore-what matters are consequences.
It may just be that investors have been thrown to the wolves, to decide which financial product to
take, all by themselves. Which, shamefully, is a bad thing because we suspect our collective
ability to decide for ourselves; but until we demonstrate lack of stupidity by actually not buying
these products, we will continue to hear calls for stronger regulation, reduced incentives and
fiduciary responsibility.
At one level, it's a free market; people should be able to buy what they want, even if they choose
to overpay, especially when such information is available to them. On the other hand, we have
seen a worldwide financial crisis built on the back of information asymmetry; you must decide
based on what you know, and you can't possibly know enough. The answer: regulate, de-
incentivise, litigate. There has to be a little of each, because in the end we are not rational beings.
But it looks like the government decision seems to have just favoured the unregulated market.
Buyer beware. If you ask me, I would tell you to blindly refuse any ULIP offered to you, for
which you will undoubtedly receive a large number of unsolicited enquiries in the coming
months. But maybe there is a way to benefit: I suggest you demand Rs. 500 per phone call,
payable in advance. For this advice, I demand no commissions.
This was just waiting to happen. Really. While Sebi’s decision—unexpected in some quarters—
to stop 14 major players from issuing new Ulips, and Irda’s instruction—arguably even more
surprising—to these players to ignore the Sebi diktat have succeeded in bringing high drama to
the usually staid world of financial regulation, the spat is actually the clearest pointer to the
problems of the fragmented regulatory structure in India.
First, some basics. Ulips are time-bound insurance plans that invest the premium in stock market
portfolios and let the insured benefit from the gains therein. The insurance cover aside, they are
practically indistinguishable from mutual funds. Of course, as Sebi’s initial order pointed out,
these 14 companies have shown as many ways in which Ulips differ from funds. But they do not
seem to alter the collective-market-investment-vehicle nature of the Ulips. Additionally, the real
motivation of the investor is also relevant. It is probably a rare individual that buys the product
for its insurance protection—it is much more of a ‘mutual fund with an insurance rider’ rather
than ‘an insurance scheme with possibility of market gain’.
Ulips also happen to be the main driver of the insurance industry. The private insurance players
have concentrated on selling Ulips that have accounted for 80-90% of their business in recent
years. LIC has been somewhat slow to respond to this shift, but over time it too went the Ulip
route in a major way, pushing the industry weight of Ulips to over 70% before the proportion
dipped a bit in the wake of the equity market slump. So, there is no doubt that Sebi’s control over
Ulips would practically cover much of the insurance industry’s new business. The stakes could
scarcely be higher.
Further, as the Irda chairman observes in his order, the stopping of new issues of Ulips can land
insurance companies in liquidity problems, jeopardising payments on existing policies
underlining the inter-connectedness of the financial sector.
Sebi certainly has a point, but the manner of asserting its claim appears to be a bit brash. On the
other hand, under the current system, there is no agency that would fix the issue, unless Sebi
itself acted on it. The issue does not require any change in laws. Reportedly, Sebi had sought and
obtained the Attorney General’s opinion on the matter. Sebi’s stand seems to mean that
irrespective of who you are—insurance company or local investment club—if you are launching
what looks...
More from Edit & Column
he last few weeks have been very perplexing for the insurance industry. For investors in unit-
linked insurance plans (Ulips), it has been equally confusing, if not more. How the turf war
between the Securities and Exchange Board of India and the Insurance Regulatory and
Development Authority (Irda) unfolds remains to be seen, but, in the meanwhile, let’s understand
the bone of contention—Ulips, which are marred with inherent problems.
Mis-selling
Herein lies the main problem. The way Ulips are structured, the agents stand to make huge gains
in the first few years. In subsequent years, their remuneration goes down and so does the
attraction to remain loyal to the policy or the policyholder. In fact, Ulips are long-term products
and need to be held for at least 10 years to give convincing returns. But agents have no incentive
to sell them as long-term products or ensure that the customer sticks to them for the long term.
Also See Where you lose (Graphic)
Though Irda stepped in last year asking agents to stick with one company for at least three years,
the move would be of little help. While the industry professes sound training and advisory
strengths to make commissions as high as 40% look legitimate, the ground reality is quite
different. Ulips are still sold as mutual funds (MFs), giving additional benefits of insurance and
tax saving. It is because of this approach that lapsation in the industry runs high. And the earlier
you close your policy, the less likely it is that you would get adequate returns .
High commissions
Agents are allowed to get 40% in commissions, but typically get about 18% of the premium you
pay. And it doesn’t stop at just 18%, every year the agent gets a portion of the premium you pay.
Typically, it tapers off to 5% in the second year and to 2% in subsequent years, becoming nil in
some cases towards the end of the tenure. But till the time you keep paying premiums, the agent
keeps making money. His incentive doesn’t stop even if he mis-sold the policy to you.
While the agents have nothing to lose if you opt out, you stand to lose money and your insurance
cover if you do so.
Front-end costs
Ulips deduct a substantial portion of the total costs in the initial years. The industry’s rationale:
The cost of procuring a customer is huge in year one. This they recover from policy allocation
charge, which includes commissions and other costs. Some Ulips that have low or nil policy
allocation charge hide this cost in policy administration charge.
Because the costs are front-loaded, in the initial years, your money pays mostly for the charges
and there’s hardly anything left to be invested. Look at it as moving into a new place: you pay
the brokerage and spend capital in logistics and setting up the house. If you realize after a month
that your house is not what you were looking for and decide to shift, you would have to spend a
huge sum once again, while losing out on what you have already spent. In Ulips, too, if you
switch to another, you would pay the same costs twice.
Confused products
Ulips are investment-cum-insurance products, but at the practical level, they give none of the
benefits. Unlike MFs, where benchmarks and comparison are readily available, Ulips still work
in isolation.
Having benchmarks, which give you a reference point to compare your returns, is not mandatory
for Ulips. In the MF industry, there are several independent entities tracking and tabulating
performance in reader-friendly formats, there is no such thing happening for Ulips.
Unlike their traditional peers that come with other pitfalls, Ulips don’t even provide adequate
insurance. The industry average is to give 10 times your premium as the sum assured and many
policies don’t give beyond 25 times. In fact, some policies only give you up to five times your
premium as sum assured.
Also, Ulips that give you the benefit of either the fund value or death benefit on death of the
policyholder expose you to serious risk—the risk of investing too much but leaving behind too
little for your family in case the market tanks at the time you die.
As a rule of thumb, financial planners suggest 10 times your annual salary as a must-have cover.
If your need is insurance, buy a term plan, the simplest and cheapest form of insurance. If you
still want to buy a Ulip, keep a goal in mind like your child’s education or marriage and keep
funding that policy till you hit maturity. But if you want to invest in equity and have a short-term
horizon or are uncertain about when you need the money, go with an MF instead.
Whilst I am not promoting the cause of ULIPs, I would like the readers and also the
financial planners fraternity to consider the pros and cons and not have a bias
against any product. Each product has its advantages and disadvantage.

Advantages of ULIP vis-a-vis Term+ MF combination

There is no difference for the investment performance between ULUP & MF. In fact
ULIP being a long term product, the fund manager can take a long term view and
does not have a significant redemption pressure and can therefore maintain lower
cash position than in a MF.

! In a term plan, level premium is charged & the excess premium collected in the
initial years, is invested in debt instruments by the insurance co. thereby growing at
a low rate. It is better to have a increasing premium term plan, where no excess
premium is collected; but such products are not available. A ULIP provides this
facility; the excess premium could be opted to be invested in equity and could grow
at a higher rate. You are aware of the great impact of power of compounding in the
long run.

2 The psychological need of getting something back for themselves, which most
people have, is not satisfied by a term plan, however much you may ask the
customer to look at the portfolio return of term + MF combo. A ULIP satisfies that.
Don't most clients look at the return of individual products and not the total
portfolio return though the Financial adviser may be advising them to.

3 FMC charges in a ULIP are capped at 1.35% but equity MF charge ~2.25%. This
difference matters when the total corpus grows to a large amount and could make
up the initial higher allocation charges of ULIP, in the long run.

4 In MFs asset re-balancing would incur some expenses (STT & service charge of the
agent) whereas in ULIPs it is free ( for a certain number of times in a year)

5 In a SIP mode of investing in a mutual fund, redirecting the amounts, would

involve stopping a SIP and starting a new SIP. Some amount of hassles are involved.
In ULIP, one instruction can change that.

5 There are no tax implications while switching between debt, equity and the
various funds options in ULIP.

6 ULIP maturity, in some cases is upto age 75 or 80 whereas term plans terminate
at age 60 or 65. Now the question of do we need insurance beyond 60 is a topic of
another discussion.
7 While comparing IRR in ULIP vs Term + MF combo, max cover allowed by ULIPs
should be considered not minimum. After all ULIP is a insurance product and not a
pure investment product ( with Insurance free as is miss-led)

India's best Ulips

January 03, 2008 09:37 IST

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We have toyed with the idea for a long time. Should we rank the unit-linked insurance plans
(Ulips) in the market? The idea is exciting simply because it has never been done in India before.
The idea is good because it allows an investor a handle with which to hold the product. Also, the
idea is very daunting because comparing insurance policies is like trying to unravel a noodle
soup. The more you stir, the more complicated it looks.
After discussing with the regulator, some industry leaders and those close to the insurance sector,
Outlook Money decided to bite the bullet and get on with the ranking.
This is where we realised what an overwhelming task we had taken on. Just comparing the return
figure, as given by net asset value data, would be incorrect since a financial product is a function
of cost and return. The minute we bring in costs, comparisons became almost impossible to carry
out.
Unlike the mutual fund product that has a very simple cost structure, Ulips carry a greater
number of costs (administration and mortality), in addition to the others.
The problem begins because all these costs are levied in ways that do not lend themselves to
standardisation. If one company calculates administration cost by a formula, another levies a flat
rate. If one company allows a range of the sum assured (SA), another allows only a multiple of
the premium. There was also the problem of a varying cost structure (as it should be due to the
mortality cost part of the insurance premium) with age.
To cut through the confusion and yet be relevant to you, we took illustrations from all 14 life
insurance companies for their Ulips for ages 30 and 45. We assumed that a 30-year-old was
taking a 20-year policy for an SA of Rs 12.5 lakh, paying an annual premium of Rs 50,000.
And a 45-year-old was taking a 10-year policy for an SA of Rs 7.5 lakh with the same premium
(see How We Did It). Premiums are paid throughout the term. We also assumed that only the
growth, or the fund with up to 100 per cent equity allocation, is chosen.
We have been forced to remove Life Insurance Corporation of India, Aviva [ Get Quote ] Life
Insurance, Max New York Life, SBI [ Get Quote ] Life and Birla Sun Life from our ranking
since LIC [ Get Quote ] does not have a policy currently alive that allows for a long premium-
paying term to fit in with our sample. Neither Max New York life, nor Birla Sun Life have fund
options with 100 per cent equity exposure that have been running for more than one year.
The unit-linked plans of Aviva Life are currently being phased out and the insurer is in the
process of developing new products. We found a major discrepency in SBI Life's illustrations.
Left with only nine companies, we looked at Type-I and Type-II policies. A Type-I policy just
gives the higher of the sum assured or the fund value, making the policy buyer extremely
vulnerable to a small corpus in case of an untimely death in the early part of the plan. A Type-II
policy gives both the sum assured and the fund value, and sure, it costs more too.
We then looked at the actual return and the internal rate of return to see which policy would give
the best post-cost return. And, since the privatised insurance industry in India is so young, we
have been forced to do a comparison of fund performance over a one-year period.
Ideally, a return history of three years should have been considered. But just five schemes would
have qualified that way. We bring you rankings on a one-year return now, but will be able to
give you a better handle with each passing year as the industry builds track record and
experience.
The result
The winner in the Type-I category is Tata AIG Life's InvestAssure II, which has scored primarily
because its one-year return, at 72 per cent, was way above the benchmark return of 53 per cent of
the BSE Sensex.
This despite the fact that it has a fund management charge of 1.75 per cent, more than double the
0.8 per cent that HDFC [ Get Quote ] Standard Life charges. In fact, HDFC Standard Life has
done very well on the cost parameter.
The insurer is clearly the lowest cost one in our examples, but has lost out due to
underperformance over the time period. At returns of 42.7 per cent, HDFC Standard Life has
underperformed the benchmark by about 10 percentage points. In fact, Tata and Bharti have
outperformed the index by 10 percentage points or more.
Four companies were unable to beat the benchmark over a one-year period. In Type-II policies,
there is much less competition, with just six companies in the fray. Kotak Life's Platinum
Advantage is the winner and has a nice mix of lower costs and decent returns. It has consistently
outperfomed the benchmark.
The insights
As we got our hands full of the innards of the insurance industry, we also got some insights that
are worth sharing. Outlook Money believes that the insurance industry has some way to go in
terms of transparency, disclosure and standardisation. The following are the gaps we found
between the ad-speak and the reality in unit-linked products.
Lack of flexibility in life cover. Ulips are known to be more flexible in nature than the
traditional plans and, on most counts, they are. However, some insurance companies do not
allow the individual to fix the life cover that he needs.
These rely on a multiplier that is fixed by the insurer. For example, a 30-year-old will be forced
to take an SA of Rs 11.25 lakh in Tata's InvestAssure II policy since the SA is 22.5 times the
premium.
Overstating the yield. Insurance companies work on illustrations. They are allowed to show you
how much your annual premium will be worth if it grew at 10 per cent per annum. But there are
costs, so each company also gives a post-cost return at the 10 per cent illustration, calling it the
yield.
For us, the most startling discovery was that some companies were not including the mortality
cost while calculating the yield. This amounts to overstating the yield. We have done the
calculations ourselves and then calculated the yield for this ranking.
Internally made sales illustration. During the process of collecting information, it was found
that the sales benefit illustration shown was not conforming to the Insurance Regulatory and
Development Authority (Irda) format.
The practice, it seems, is still prevalent in many locations30 per cent return illustrations are still
rampant. During the process of collecting information, we found out that future return
projections in the illustrations were not sticking to the 6 and 10 per cent stipulated by Irda.
Not all show the benchmark return. To talk about returns without pegging them to a
benchmark is misleading the customer. Though most companies we found were using the
Sensex, BSE 100 or the Nifty as the benchmark, or the measuring rod of performance, at least
four companies are not using any benchmark at all.
Type-II plans still few. Outlook Money believes that an insurance policy's chief aim is to protect
the financial future of the family of the insured, starting from the day of the policy, and not from
year 10 or 15. This makes a policy that gives the SA plus the fund value as death benefit superior
to the one that just gives the fund value.
The fund value will be small in the first seven to 10 years of the policy term and will not serve as
a good insurance product. We found that just six of the 14 companies offer such a plan. Few
more exist, but are in the nature of whole-life plans.
Early exit options. The Ulip product works over the long term. The earlier the exit, the worse
off is the investor since he ends up redeeming a high-front-load product and is then encouraged
to move into another higher cost product at that stage. An early exit also takes away the benefit
of compounding from him.
An early exit option in a unit-linked plan shows how the product is structured. We found many
products that clearly encouraged product churn by giving too many zero cost options to get out
of the policy after the mandatory holding period was over. There are others, like the plans from
MetLife, which encourage a longer holding term.
Creeping costs. Since the investors are now more aware than before and have begun to ask for
costs, some companies have found a way to answer that without disclosing too much.
People are now asking how much of the premium will go to work. There are plans that are able
to say 92 per cent will be invested, that is, will have a front load of just 8 per cent. What they do
not say is the much higher policy administration cost that is tucked away inside (adjusted from
the fund value).
While most insurance companies charge an annual fee of about Rs 600 as administration costs,
that stay fixed over time, there are plans that charge this amount, but it grows by as much as 5
per cent a year over time. There are others that charge a multiple of this amount and that too
grows.
Incorrect FMC. Another startling revelation was that illustration benefits of certain insurers did
not have the provision of taking the relevant percentage value of FMC for the fund option
chosen. The illustration will use the debt fund FMC, which is lower, even in an equity fund
calculation, overstating the final corpus. This leads to a big difference in the maturity value
causing misleading results.
Non-standard illustrations. At the last minute, we had to drop SBI Life from our rankings since
their illustrations data differs across various sources. The data taken from the company itself,
taken from the website and that from the agent show varying allocation for the FMC.
The FMC is important because over the long term a difference of even 0.5 per cent each year
charged to the growing investment will make a huge difference in the final corpus.
The difference in the corpus in this case was Rs 3,53,299 lakh. ING Vysya Life, too, uses its
fund management charge in the illustrations in a peculiar way. The illustration is made on the
basis of 1.15 per cent FMC a year, although the applicable FMC on the equity fund is 1.5 per
cent. This causes the final corpus to be overstated.
We have taken the first step in bringing a handle to hold the Ulip product. We invite you the
investor, the industry and the regulator to add to this process with suggestions and comments.
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BUSINESS LINE

Understanding ULIPs
Suresh Parthasarathy | 2009-03-29 08:59:58

•
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Insurance is usually bought by an investor seeking to transfer risk from an individual to a poole to
protect against untoward incidents and to provide for monetary •
yo
compensation to his family. With the introduction of ULIPs, Also see Sp
ur
eci
investment plans vended by insurance companies, this logic has Ta
al:
been turned on its head. Unit linked insurance plans (ULIPs) •x
Tat
are pitched as an investment product rather than as a risk shield ret
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and it is the unit holder who bears the risk of market swings in urn
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these products. s
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While insurance companies pitch ULIPs as a product for the •Jai
Ind
Sp
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long term, there is considerable mis-selling of ULIPs in today’s Ho
Lat
ia
eci
ets
market scenario and many investors sign up for ULIPs without est
al
&
really understanding their risks. Here are some points about on
Giz
ULIPs that your agent probably won’t tell you: Sat
mo
ya
Guaranteed vs illustrative returns: Many ULIPs are today s
m
marketed as products that offer a “certain” return over a specific time period. “Invest Rs 15,000 fias
and double your money in five years”, is the kind of pitch often used to sell ULIPs. But investors co
need to distinguish between an “illustration” provided by an agent (which is based on
assumptions) and an actual “guarantee” by an insurer. If the product is a ULIP, it carries market
risks – usually there are options of investing in various proportions of equity and debt, based on
the individual’s risk appetite.
ULIPs: For long-term savings
There can be no assured returns possible unless the insurer states guarantee in the offer document
of the product. If you are invested in the pure equity option for a ULIP, it requires you to monitor
the performance of equity markets closely, especially closer to the goal. It’s always advisable to
switch a sizable portion of the fund value to debt at least a couple of years ahead of the goal, to
protect the corpus.
Paperwork is important: The Insurance Regulatory Development Authority (IRDA) makes it
mandatory for every insurer to provide an illustration to accompany every ULIP sold. This
illustration should project returns assuming 6 and 10 per cent annualised returns and take the
signature of the policy holder on the same. Unitholders should note that the “returns” shown in
the illustration are based on assumptions and may or may not really materialise. They also need
to note that their effective returns will be reduced by expenses.
In general, for a 10-year plan, the net effective returns will be between 5.5 and 6.0 per cent, net
of expenses charged, if the plan earns annualised returns of 10 per cent. Returns are higher if the
plan has a maturity beyond 10 years.
If one reads the product brochure closely, one will find various expenses such as premium
allocation charges, policy administration charges, mortality charges and fund management
charges in a ULIP. If a fund charges 0.80 per cent as fund management charge, it has potential to
deliver much higher returns than one charging 1.25 per cent, even if the premium allocation
charge is lower in the latter case.
Beware of combo insurance plans
The expense structure also implies that ULIPs are meant only for long-term goals and are not a
good avenue for the short term. Marketing agents often try to sell ULIPs as three-year products
and suggest you withdraw the proceeds at the end of three years. But that is a surefire way to lose
money as expenses will be particularly high in the initial years and surrender charges also may
apply for premature termination!
One reader cites an instance where he paid premiums for three years in a ULIP totalling Rs
52,000. When he approached the insurer to surrender his policy, he was informed that he would
receive only Rs 19,800!
Use the switches and redirection: Those who buy ULIPs should understand the importance of
switches and redirection options that come with the product. These two options are very useful in
protecting the corpus in a highly volatile market.
Switches come in handy in turbulent times such as the past year. If you are worried about stock
markets steadily declining, you can shift your accumulation from equity to debt plans without
any charge. Similarly, in those periods where your renewal premiums are due, you can give
direction to the insurance company to invest the fresh premium in the debt option.
Claims can be repudiated: ULIP products usually bundle a life cover with investments, but
remember that claims can be repudiated if you’ve not met the formalities correctly. One
insurance player points out that the repudiation ratio (claim ratio in death) is as high as 20-30 per
cent of the total claims, mainly due to non-disclosure facts.
Tax investments and risk
This generally arises in cases where the agent fills in the application form. Though it is not
wrong for an agent to fill the application form on your behalf, the policy holder has to understand
the importance of the medical questionnaire that comes as part of the application form.
The family case history, your occupation, place of work, pre-existing diseases and your life style
risks (e.g. if you consume alcohol, the frequency) all are very important for the underwriter (read
as insurance company) to evaluate your risk profile.
So, leaving these details to the agent and simply signing on the dotted line exposes you to the
risk of the claim not being met, when the time comes. It is mandatory to go through these clauses
and get clarifications from the agent before writing out your cheque for the first premium.
If you have mis-stated some points you still will have fifteen days’ grace period from the date of
receiving the policy document to rectify them. But if you want to return your policy at this point,
you will incur some charges.
Orphan policy holder: If your insurance agent moves out from one insurance company to another
or stops working for the insurance company, you, as a policy holder, will not be in a position to
use the services of the agent.
Get your financial priorities right
That may lead to your missing out on renewal premia and forfeiting the policy. Of late, due to
increase in lapsation rates, insurers are trying to reach out to policy holders directly, to remind
them to pay the renewal premium.
More India business stories
One good way to avoid lapsation of policy is to opt for ECS debits for the premium amount. It is
also mandatory for one to inform the insurance company immediately if there is a change in the
communication address.

New ULIPs more investor friendly

BS Reporter | 2010-06-29 02:01:00

The Insurance Regulatory and Development Authority (Irda) has introduced sweeping changes
in the structure of unit-linked insurance plans (ULIPs).
Effective September 1, ULIPs will offer a minimum guaranteed annual return of 4.5 per cent on
pension plans, a 10-times increase in the minimum risk cover, even distribution of charges across
the increased five-year lock-in period and a ceiling on net and gross yields after that.
ULIPs will also come with a health or mortality cover.
The new guidelines come a week after the government issued an ordinance giving Irda full
control over the ULIPs.

7 investment mistakes you should avoid

"Some of the major changes like lock-in period and compulsory annuitisation are quite good,’’
said Kamesh Goyal, country manager & CEO, Bajaj Allianz Life Insurance.
Front-loading of costs will be curtailed, as insurers will have to evenly divide the costs across the
lock-in period, which has been increased from three to five years. During this period, no
residuary payments on policies which have lapsed, been surrendered or discontinued will be
made.
Any top-up premium will be treated as single premium for the purpose of insurance cover and be
locked in for the same period.
At present, if one buys a ULIP where the annual premium is Rs 10,000 a year and the sum
assured is 10 times, or Rs 1 lakh, the buyer has the option to purchase a top-up cover by paying
an additional premium. If one pays, say, up to Rs 2,500 as a top-up, the person need not buy
additional insurance and may instead use the funds for investment purposes. Over 25 per cent, or
Rs 2,500 in this case, would be used to purchase an insurance cover.
But when the new norms kick in, insurance companies will have to mandatorily throw in a risk
cover even in the initial 25 per cent top-up plans.
Front-loading of charges during the first year of a policy, a practice popular with insurers, will
now come to an end. The regulator has mandated that overall charges be distributed in an even
fashion during the lock-in. Caps on the difference from the fifth year (4 per cent) to the end of
the policy term (3 per cent for a 10-year policy and 2.25 per cent for a 15-year policy) add to
reduction in costs.

Insurance is not a good investment option

Insurers are not too happy with this particular move.
"The capping of expenses' guidelines have been made very stringent. Small regular premium
policies will become unviable; thus, a large proportion of people who were paying premium of
less than Rs 15,000 or so a year will suffer. Second, the commission structure can’t sustain an
agent’s income; the agency channel will suffer badly. I hope we don’t land in a situation where a
product is very good but no one is willing to sell it," added Goyal.
The minimum insurance cover has also been increased from five times to 10 times the annual
premium of a regular policy or 125 per cent of a single premium policy for customers below 45
years of age.
For customers older than 45 years, the minimum cover has been increased to seven times the
annual premium of a regular policy or 110 per cent that of a single premium policy.

4 ULIP 'sales pitches' you must know

Irda has also stipulated that the maximum loan amount that can be sanctioned under any ULIP
will not exceed 40 per cent of the net asset value (NAV) in those products where equity accounts
for more than 60 per cent of the total share, and 50 per cent of the NAV where debt instruments
account for more than 60 per cent of the total share.
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